By taxing both income and consumption at punitive rates, the government drains the surplus with the middle class, which could have been used more efficiently for higher consumption, triggering higher production or savings, leading to more funds for investments.
Summer is that wretched season when your insides become a furnace and molten lava flows through your veins. Hopeful morning walkers gaze steadfastly above your head not because they are being snooty — at least not all — but because they seek solace in every passing cloud as the harbinger of the monsoon. Not that the rains make things any better — sweat drenched fellow Metro passengers stink, clogged drains flood roads and the torpid stupor of the tropics urges one to just be — hibernating from the searing heat.
India does not encourage people to just hang about during the summer. Sadly, so many of us have no choice but to continue to labour away through the preposterous weather. This is the bottom 60% which continues to live today, the way all of India lived in the 1960s — hand to mouth. India’s poor have a precarious existence. But are the 30% — famously referred to as the middle class, really so substantially different?
A broad definition of the middle class is those who can afford to educate their children, provide adequate healthcare and still have a surplus after consumption. The finance minister vicariously defined the upper income bound for the middle class, in the Budget last year (2017-18), by imposing a surcharge of 10% on top of the prevailing top income tax rate of 30% for an annual income above Rs 50 lakhs. The implication being that these were the rich who could therefore be soaked by the taxman. To make them feel relatively better, he imposed an even stiffer surcharge of 15% on the uber-rich, with an annual income of above Rs 1 crore.
The income-tax structure also reveals an implicit lower bound for middle class income. Annual incomes up to Rs 2.5 lakhs is not taxed. Clearly, this is where being poor ends. Those earning up to Rs 5 lakhs per annum pay a marginal tax of 5%. But above this income level, the income tax is a hefty 20%. Clearly, this is where the middle class begins. Massive evasion and inefficient tracer mechanisms to assess income better do not, however, yield a tax base which aligns with the oft-heard numbers of 400 million Indians being in the middle class category.
The government’s implicit definition holds up using a household as a base. Households vary in size. But if a household earns less than Rs 8,000 or more than Rs 83,000 per household member per month, it is either too poor or too rich to qualify for being middle class. The great urban Indian middle class is pretty diversified — salaried public or private sector employees, small retailers and service providers like Uber and Ola drivers, minor chefs, staff in healthcare, education, hospitality or tourism companies, financial sector employees, self-employed lawyers, chartered accountants, engineers or employees of the gig economy.
This is the community most affected by summer tantrums. The kids are home from school and need to be entertained. Spouses or aged parents can’t be left fanning themselves in the heat while the working members swan around in airconditioned shops, offices, factories or laboratories. Running a 1.5 ton AC at home from June to August for 15 hours a day is a major expense just on electricity without including the annual maintenance and depreciation charge for replacing it five to seven years hence. Despite carefully setting it to turn off at 3 a.m., by when you are in REM sleep, and ensuring that it is not turned on before 11 am, by when the heat kicks in perceptibly and the kids start whining — if you are the type of household which consumes less than 500 units every month it will more than double your use of electricity and bleed you of Rs 9,000 per month. Not a consequential expense if you are a two-member household earning Rs 1 lakh a month, but unaffordable if you are a five-member household with the same income.
More important, if the sun is burning a hole in your head, income-tax is doing the same in your pocket. It has to be paid by 31 July. And that by itself is a hefty sum. A five-member family with an income of just Rs 83,000 per month has to pay more than one month’s income as tax. But it doesn’t end there. When you buy an air-conditioner you pay a 28% Goods and Services Tax. When you buy electricity to run the device you pay a 5% electricity tax on every unit, and in addition a surcharge of 12% for, among other worthy causes, pensions. Whose — you may well ask?
By taxing both income and consumption at punitive rates, the government drains the surplus with the middle class, which could have been used more efficiently for higher consumption, triggering higher production or savings, leading to more funds for investments. There is a fundamental trade-off that we are fuzzy about, between being an efficient, rationally-taxed, private sector-led economy — a mantra which every government since Prime Minister P.V. Narasimha Rao’s has sworn by — and a punitively-taxed state investment-led, low efficiency economy — which is what we have become.
It does not help that the tax base remains despairingly low and the same law-abiding citizens and entities get taxed ever more by each succeeding government. Extortionist taxes for the middle class with a stagnant tax to GDP ratio at below 12%; socialising the cost of blatant crony capitalism aided by obliging and complicit bank managers — who escape unscathed and rising inequality are “dhili” (loose) foundations for building a sharing economy.
This summer, as our political elite relax in the soothing cool of the leafy and shaded Lutyens’ Delhi, spare a thought for the middle class and show them some love. They also vote, you know.
This commentary originally appeared in The Asian Age.
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Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...
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